Amid volatility in currency and equity markets, investments in real estate are becoming an increasingly sought-after way to preserve and multiply capital. Investors invest both in new and secondary housing. Which strategy will be more promising?
In June, the Central Bank of Russia retained the key rate of 7.5%, which was set last fall. For the property market, this is good news: banks are unlikely to raise mortgage and loan rates for developers in the near future. In general, after the crisis of 2022, housing prices will stabilize.
It is expected that the demand for the purchase of apartments, despite the temporary drawdown, will gradually recover. People understand that the situation with rates on mortgages and prices is likely to remain similar in the coming months.
In the segment of buyers there are not only those who purchase an apartment as a residential property, but also investors who want to capitalize on rising value of real estate. But how to determine what will bring greater returns in short-term and long-term – new apartment or secondary one? That’s what I want to talk about in more detail.
Types of real estate investment
Traditionally, there are two main strategies for investing in real estate.
1. In the short term, you buy an apartment, own it for about 1.5-2 years, and then resell at a higher price. Very often investors do this, for example, with new buildings at the construction stage (usually this is the start of sales or pre-sale). The closer the timing of the commissioning of the objectб the more expensive housing becomes.
A short-term strategy can provide the largest and fastest returns, but it is more risky – the apartment should grow rapidly in price, and this does not happen always. For example, if the developer for some reason suspends construction, your investment will also be frozen indefinitely.
2. Medium-term and long-term investments are commonly used to receive stable passive income from real estate (for example, from delivery in lease). A properly selected object also grows in price over time. Therefore, with a competent strategy, the investor makes a profit, even if initially he purchased an apartment on a mortgage – income from tenants covers payments to the bank.
3. As a rule, such an investment strategy is designed for a period of 5 years or more. It usually generates less profit than short-term options, but it is more reliable. It is suitable if you are ready to wait long enough to preserve and increase capital.
Investment in new buildings
When investing in new apartments, people use both strategies, although preference is more often given to the short-term option. In general, when betting on new housing, the investor needs to take into account quite a few factors. New buildings, for example, are greatly affected by the potential for infrastructure development.
Let’s imagine the situation: two identical houses for the same project are built at a distance of 300 meters from each other. But one building is located opposite the forest, the cutting of which was banned, and the other faces the construction site of transport hub and trade center. Potential for property value growth in the second case would be much higher.
In addition, in the case of new buildings, it is always very important to make sure of integrity of the developer. You need to check the title documents for the land plot, urban planning and regulatory documentation, as well as templates of alienation contracts for real estate.
- The new building is able to grow rapidly in price – including due to external factors, for example, the construction of a new transport hub near the residential complex.
- Depreciation of premises and communications does not affect the cost of new housing in any way.
- For primary real estate, banks often offer better conditions on mortgage programs.
- New housing is usually more attractive to renters.
- If an apartment is purchased at the pit stage, there is a possibility that construction can be delayed, which means that housing will grow more slowly in price. In past such investments have been riskier because of the opportunity of clashes with an unscrupulous developer. Now the buyer’s funds are transferred to an independent escrow account – in case of bankruptcy of the contractor or the bank an amount up to 10 million rubles can be returned.
- When investing in new buildings, you need to assess carefully the quality of work of developer. Unfortunately, if the house is new – it does not mean that it is necessarily well built. It is best to order an independent construction expertise before buying.
When it is best to buy
New buildings, as a rule, are most profitable to buy in the “dead season” – in the summer or right before the New Year. The fact is that during the holidays people are usually do not do serious spending. At the same time, developers still need to execute the sales plan. Therefore, during stagnant periods, they often offer various promotions and discounts. Now on the market there is just the traditional seasonal decline of demand – in June-July you can find offers that will not be, for example, in September-October.
Investment in secondary real estate
Secondary real estate rarely rises in price quickly over a short distance. Therefore, investors are more likely to consider medium- and long-term strategies to work with such housing. The cost of secondary housing is less often influenced by a new infrastructure – such apartments, as a rule, are located in already equipped areas.
When buying secondary housing, you also need to check sellers carefully for good faith. For example, a buyer may lose home rights if it turns out that there were other people associated with the previous owner.
- Real estate in the secondary market is almost always cheaper than similar options in new buildings.
- When renting out, such housing is in demand due to greater affordability.
- The older the apartment, the more the wear factor affects the increase in value of premises and communications. Even with a general trend towards higher market prices an apartment built 30-40 years ago always rises in price less than new housing.
- Banks provide preferential mortgage loans and social programs much less often for the purchase of secondary housing.
When it is best to buy
Right now. Due to preferential mortgage programs in the summer of 2022, buyers paid more attention to new buildings, and there was a secondary building overstocking on the market. Over the year, many apartment owners are tired of waiting for sales, so in some cases, they are ready for an additional discount. So, in some Moscow districts prices in the secondary market are 15-20% lower than for similar new buildings. Plus, do not forget about the traditional decline in demand in summer season – the fewer buyers, the more difficult it is for the owner to refuse from the discount.
If the apartment has high-quality repairs, the owner is ready to leave equipment and furniture, then this is a very good option for renting out. Especially if housing is located in a historic area near the transport hub.
On the prospects for investing in 2023
It is difficult to answer the question of what is more profitable – investment in new buildings or secondary real estate. Both have pros and cons.
But all other things being equal, I would recommend choosing a new building – new apartments have more potential for growth in value at both short and long distance. In addition, when buying a home from a developer, you can take advantage of profitable mortgage programs, discounts and benefits, which are almost absent on the secondary market. Often this factor overlaps the higher initial cost of new buildings.
If we talk about the prospects for investing in general, then in the last 2-3 years in the real estate market, it is difficult to give long-term forecasts. First the mood of buyers, developers and banks was affected by the pandemic, and later by two years is a difficult economic situation, when the key rate at once rose to 20%. In 2023, the market is in a slight stagnation, but already there are noticeable trends that prepare us for a gradual increase in prices for real estate. This process can take up to 2-3 years, so now, before the start of lifting, entering the market is most profitable.
In general, despite local drawdowns, investments in real estate continue to be one of the most stable ways to preserve and multiply capital. After all, unlike stocks or cryptocurrencies, an apartment and home are real physical assets that cannot depreciate. They cannot be blocked or seized by foreign companies, they are not affected by international sanctions. And even after a temporary price cut the cost of housing, as a rule, exceeds the pre-crisis marks. Therefore, if the investor is ready to play over a long distance, he will most likely remain winning.
By Barno Tursunova, founder of a real estate investment agency Barno Estate